Stability indicators cushion Tanzanian banks

Tanzania has a well-developed and diverse financial services sector, with large domestic and multinational lenders present, and a rate of financial inclusion that exceeds that of most other large economies in Africa. However, in line with major markets elsewhere on the continent, just five bodies account for roughly half of total assets. The year 2017 was challenging for Tanzania’s banks, as they adjusted to changes in economic and regulatory environments. Slowing credit growth and increasing loan defaults have compelled the regulator to intervene, adjusting policy rates and increasing supervision of troubled lenders.

That being said, the fundamental stability indicators of the sector remain sound, and the industry is well positioned to take advantage of opportunities arising from the government’s development programme.

History 

Commercial banking in Tanzania began in 1905, with the establishment of the Deutsch-Ostafrikanische Bank in Dar es Salaam. As the mainland was part of German East Africa, it was the German government that granted the bank its concession to issue its own notes and coins. The sector’s contemporary history began just over 60 years later. The Bank of Tanzania (BoT), the country’s central bank, was established just eight months before the famous 1967 Arusha Declaration, which proclaimed Tanzania – formerly a mandated territory of the UK and a member of the East African Currency Board – a socialist state. The fledgling banking sector was subsequently nationalised. This included the assets and liabilities of large international institutions such as Barclays, which transferred 28 offices and 12 full branches to the National Bank of Commerce (NBC). The NBC became the sole commercial bank in Tanzania, ushering in a period of state monopoly that is regarded as the first phase of the modern banking sector’s history. During the 1970s a number of stateowned, specialised banking institutions were formed, including the Tanzania Investment Bank and the CRDB Bank, which started to offer chequeing accounts. The monopoly of these institutions stifled innovation and development, while preferential interest rates for state-owned commercial enterprises limited private sector growth and resulted in a high level of non-performing loans. The NBC had to borrow increasingly large tranches of capital from the BoT to maintain its lending operations, which in turn led to a rapid expansion of money supply and high rates of inflation.

This scenario ended in 1991, with the passage of the Banking and Financial Institutions Act. This legislation worked to liberalise the sector and strengthen the monetary policy role of the BoT, in a step that marked the beginning of the second phase of the sector’s development. Publicly owned banks were gradually restructured and privatised, with the CRDB completing this process in 1996. The introduction of banking competition, alongside a wider process of financial services reform that included the development of the nation’s capital markets, has radically altered Tanzania’s economic landscape.

The Modern Sector

The banking sector is a mix of institutions, offering a range of products to an increasing percentage of the population. As of mid-2017 there were 41 fully fledged commercial banks licensed by the BoT. This makes for a crowded sector, with multinational giants such as Standard Chartered, Citibank and Barclays (which re-entered the market in 2000), competing with regional heavy hitters like Stanbic and smaller local operators.

While the market is fragmented, a relatively limited number of institutions play a dominant role in the sector. According to the central bank, at the close of 2015 the four largest banks in Tanzania accounted for almost half – 47.5% – of the sector’s total balance sheet, while the 10 largest accounted for 70.5%. The sector is therefore a top-heavy one in terms of asset distribution, with the 31 banks at the smaller end of the market sharing less than a third of total assets.

State Role

In addition to commercial banks, the market includes three financial institutions that each have a more focused mandate. These include the Tanzania Agricultural Development Bank, a state-owned development finance institution charged with providing short, medium and long-term credit facilities to the agriculture sector; the Tanzania Mortgage Refinance Company (TMRC), a mortgage liquidity facility which provides long-term funding to financial institutions, and is owned by 14 banks and other financial institutions; and TIB Development Bank, which since 1970 has been focused on financing industrial developments.

Major Players

Tanzania’s “big five” banks by total assets reflect the diversity of the sector. While all of them are universal banks, offering retail, business, Treasury and wholesale services to their customers, their backgrounds and approaches differ considerably.

The largest of them, with total assets of TSh5.2trn ($2.4bn) at the close of 2016, is CRDB – the stateowned bank that was privatised shortly after the liberalisation of the market. Its long history and legacy as a state-owned body means it has played a prominent role in the socio-economic development of the country. Now a publicly listed company, by the close of 2015 CDRB had 119 static branches across the country, and a microfinance subsidiary. It has also begun to expand beyond Tanzania, establishing a subsidiary in Burundi in 2012.

The second-largest commercial bank in Tanzania, with total assets of TSh5trn ($2.3bn), is the National Microfinance Bank (NMB). The bank was incorporated in 1997 as a result of the dismantling of the stateowned NBC. Its original mandate granted it limited lending capabilities, but when the bank was privatised in 2005 it became a universal retail bank. While a 31.9% stake remains with the government, Rabobank of the Netherlands is the largest shareholder. As of end-2015 the bank operated 165 branches within Tanzania, giving it the largest branch network in the country.

The NBC, in its present form, is the core business of the state-owned bank of the same name that was dismantled in 1997. In April 2000 it was privatised and sold to Absa Group (now called Barclays Africa Group) of South Africa. Despite the loss of its monopoly status and division into three entities (NBC, NBC Holding Corporation and the NMB), the bank has the third-largest asset base in the market, at TSh1.7trn ($773.2m). Its network of 52 branches is the country’s third largest.

Standard Chartered’s Tanzanian assets of TSh1.4trn ($636.8m) make it the fourth-largest bank in the country. The banking and financial services company operates more than 1200 branches across seven countries, with a particular focus on Asia, the Middle East and Africa. Over the past century it has driven innovation in the domestic industry, introducing the first ATM in 1997 and the first Visa Electron debit card in 2004.

Stanbic Bank rounds off the “big five”, with assets of TSh1.1trn ($500.3m). It is a subsidiary of the Standard Bank, a member of South Africa-based Standard Bank Group. Standard Bank trades under the name of Stanbic in 11 African countries. Outside Africa, Standard Bank Group operates in seven countries, with an emphasis on emerging markets. Its domestic presence dates back to 1995, when the group acquired the operations of Meridien BIAO Bank Tanzania. Since then it has established 10 branches in the country.

Performance

The large and increasingly competitive banking sector faced difficult market conditions in 2016 and 2017. At the macro level, the government is tackling a structural deficit through economic reforms. This has included measures to lower spending limits for a range of government institutions and slow development spending (see Economy chapter).

These developments are helping to improve the economy’s sustainability, but have also made it difficult for banks to grow their assets, and resulted in a surge of the number of non-performing loans (NPLs). In 2017 a number of lenders had crossed the BoT’s NPL advisory threshold of 5% of gross loans, compelling the regulator to intervene in some cases (see analysis).

Some measures have also directly targeted banking in particular. In 2016 the government introduced an 18% value-added tax (VAT) on all bank transactions, asking banks initially to absorb the costs rather than pass them on to customers. However, lenders were subsequently told that they should apply VAT according to the letter of the law, and charge the additional tax on their services.

As well as the taxation cost, banks have had increased operational costs as they alter their systems to accommodate the change. However, in terms of performance, the most significant government directive was the January 2017 decision to request all ministries, public corporations and local authorities to transfer their funds from commercial banks to the BoT. The result has been an outflow of deposits from commercial banks, which some estimates have placed at TSh600bn ($272.9m). The contraction of the aggregate deposit base has led to concerns regarding sector liquidity, and has limited the ability of some institutions to extend loans (see analysis).

Lending

The 2016 financial statements of the big five showed that their combined loans and advances grew by 6% over the year. This represents a slowdown on the double-digit growth the industry has enjoyed in recent years. BoT data shows that for most of 2015, credit expanded by more than 20% year-on-year, but by April 2017 the rate eased to just over 3%. The ability of banks to lend depends largely on their capacity to tackle the diminished deposit growth in 2016. The outlook for growth in deposits, however, remains mixed.

In terms of lending opportunities, loans connected with trading activity have been the largest recipient of credit in recent years, followed by personal lending, manufacturing and agriculture. According to World Bank data based on bank rates that satisfy short- and medium-term financing requirements of the private sector, the lending interest rate stood at 16.1% in 2015 – one factor seen as being a barrier to credit access.

Distribution

As of 2015 there were 782 domestic banking branches, mostly concentrated in major urban areas like Dar es Salaam, Arusha and Mwanza. However, technological advances are opening up options for lenders. The number of Tanzanians with mobile money accounts rose to 19.2m – some 35% of the population – by March 2017, according to the Tanzania Communications Regulatory Authority, up from 18.1m at the beginning of the year. “Increasingly, basic transactional banking is being done via digital platforms. The role of physical branches is more reserved for providing advice on complex, high-value transactions, such as loans, mortgages and retirement investments,” Ken Cockerill, CEO of Stanbic Bank, told OBG.

Technology is also driving the growth of agency banking, which first received official regulations in 2013. The agent banking guidelines introduced by the BoT permitted financial institutions to hire retail agents to provide banking services, which thereby enabled banks to reach lower-income and remote areas. By the start of 2016 a total of 13 Tanzanian banks had established 3299 operating agents at locations across the country (see analysis).

Regulation

The task of overseeing the sector falls to the BoT. Headquartered in Dar es Salaam, it also maintains branches in Arusha, Mbeya, Dodoma, Mwanza, Mtwara and Zanzibar. Its principal executive function is the determination of monetary policy, but it also supervises and promotes the banking sector. It carries this out according to the Banking and Financial Institutions Act of 2006, and subsequent 2008 and 2014 prudential regulations. This legislation replaced the 1991 law, and was broadly welcomed as a significant step towards bringing the country in line with international banking standards. Although Tanzania is not party to the Basel Convention, the capital reserve requirements established in 2006 exceed Basel demands. As the central bank has developed its regulatory structure over the past decade, it has been mindful of the evolving Basel framework. Based on OBG discussions with the BoT, Basel I criteria have been fully implemented, Basel II has been almost wholly implemented, and some elements of Basel III had been adopted as of mid-2017.

Mortgages

More recently, the BoT has focused on mortgages, amending the Mortgage Regulations in 2015, rolling out a mortgage literacy programme and working with the World Bank on the Housing Finance Project, which aims to develop the mortgage finance market by providing medium- and long-term liquidity to mortgage lenders. This project also includes the Ministry of Finance and Planning, and the Ministry of Lands, Housing and Human Settlements Development, and has resulted in the creation of the TMRC, which supports banks’ mortgage lending by refinancing their mortgage portfolios. Before the TMRC was founded in 2010, three banks offered mortgages; today, 28 banks offer them to the primary market. The cost of mortgages has also fallen, largely thanks to the 5% discount from the World Bank enjoyed by the TMRC.

Financial Stability

The year 2016 saw the BoT’s short-term focus shift to tightening liquidity and rising NPLs. Fortunately for growth prospects, the BoT’s conservative regulatory stance means it has entered this challenging period from a prudentially strong position. According to the BoT, the capital adequacy and liquidity buffers of the sector remain above regulatory minimums. In the third quarter of 2016 the capital adequacy ratio stood at 17.3%, well in excess of the required 10%, and an increase on the previous September’s ratio of 16.7%. This resilience was ascribed to capital enhancement by some banks through retained earnings and, in some cases, capital injections. The liquidity ratio, meanwhile, stood at 34.2% in September 2016, well above the 20% regulatory requirement.

Credit Bureaus

While the rising level of NPLs remains a challenge, the sector is beginning to benefit from the development of credit reference bureaus (CRBs) in Tanzania. The BoT issued its first CRB licences at the end of 2012 to Creditinfo Tanzania and Dun & Bradstreet Credit Bureau Tanzania. These cover both personal and business lending, and have established data-sharing arrangements with banks and microfinance institutions, as well as insurance companies. Services offered include credit enquiries and credit reports. However, in credit bureau terms, the industry is at an early stage of development; data transmission from financial institutions is imperfect, with key indicators suggesting that borrowers’ credit information available in bureau databases is incomplete. Furthermore, the introduction of risk-based lending with preferential rates for lower-risk customers is a medium-term prospect rather than a short-term one.

Outlook

Tanzania’s key financial stability indicators show the sector is well defended against external and domestic shocks. The most salient question, therefore, is how its profitability will be affected by the government’s development and reform agenda. Tanzania’s GDP grew by 7% in 2016, according to the IMF, but by the end of 2016 data suggested a softening of economic activity. How this develops in 2018, and what effect this will have on system liquidity, remains to be seen. While a long-anticipated phase of sector consolidation has yet to begin, the problem of NPLs and the challenge of raising capital may encourage some firms to explore merger options in the near term.